I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

A Behavioral Economist Says You Deserve A Prize For Reading This Post

The media industry is being torn apart by waves of creative destruction. Once-stable franchises like CBSCBS, The New York Times and even FORBES are thrashing about, looking for ways to hold on to their readers and maintain their share of a shrinking advertising market.

What’s the solution? Bring back sweepstakes, says Gerhard Fehr, a Switzerland-based consultant, behavioral economist and former journalist who advises companies on how to deal with rapidly changing markets. Electronic prize tokens, quizzes and other gimmicky tactics — once the hallmark of failing daily newspapers — are one way to strengthen ties between readers and content producers in a business where GoogleGoogle is siphoning up most of the advertising profits and publishers long ago made the fatal mistake of giving their products away for free.

Management in the media industry “is a very nice example of how you can misjudge the whole situation,” says Fehr, a University of Vienna-trained economist and younger brother of behavioral economist Ernst Fehr, who frequently appears on the shortlist for a Nobel prize. (Full disclosure: My sister works for Ernst Fehr.) Many place their faith in paywalls, but only the New York Times has a strong enough franchise to make it work, Fehr said.

Gerhard Fehr: Media is all about relationships.

Journalists aren’t spared his criticism. They “believe readers can really differentiate better quality from lack of quality,” said Fehr, himself a former journalist. “But we know from experiments that the same text, in different wrappers, can have very different perceptions.”

OK, by now Fehr’s lost most of the journalists in the audience. But hear him out. It’s science he’s talking about, the science of human behavior.

Zurich is a hotbed of behavioral economics research, where postdocs at Ernst Fehr’s University of Zurich lab and other sites across the city use functional magnetic resonance imaging, trans-cranial stimulation and other techniques to test how people react to carefully constructed financial scenarios. One example: Fehr and his colleagues have shown that men who are conditioned to expect a racy picture of a woman in a bikini when they click on a specific symbol will later ignore a definite financial payoff in favor of trying to see the picture again. So much for classical economics. Pyschologist Phillippe Tobler calls it “the neurobiology of suboptimal decision-making.”

There has been plenty of suboptimal decision-making in the media industry, starting with the idea of giving content away in hopes of driving up readership, Gerhard Fehr told me. Repeated experiments have shown the folly of giving things away because it can destroy a market, he said. When people have a choice between a good that costs 15 cents and one that costs a nickel, he said, about 70% will choose the more expensive one in the belief it is also more valuable.

That relationship is remarkably stable as experimenters change the prices, until the lower-priced good reaches zero. Then 90% of the subjects choose the free item. Raise the price back up to a penny, “and it flips completely,” back to 70/30, Fehr said.

This explains the poor performance of pay walls (only the New York Times seems to be able to make them work, Fehr said). Worst of all, “if one goes to zero, everybody else has to go to zero.”

So how to media companies use behavioral economics to get out of this mess? Sweepstakes, prizes, quizzes and other gimmicks, unfortunately. “Media companies have to learn the business they have is not transactional,” Fehr said. “It’s relational. It’s reciprocal.”

An example of what he means: Imagine coming home and telling your wife you’re really hungry and you will pay her $50 if she cooks you a good meal, and another $10 if she cleans up afterward. Might make sense to a business-school grad, who can compare the price of the meal to its value and calculate a return on investment. “But what’s the ROI of your wife?” Fehr asked. It’s the wrong question to ask in a relationship business.

Media companies have to focus first on inviting their customers to participate – our own Lew D’Vorkin has been pushing this strategy for years – whether it’s commenting on stories or signing up for special interest portals. Fehr suggests rewarding loyal readers with prizes they can redeem for the things media companies are particularly well-positioned to offer: Sports tickets, access to celebrities, invitations to glamorous events. There should be a quiz or some other tool for participation with every article.

The key, especially for male consumers, is “you must be able to earn different status levels,” he said. “And for a publication like Forbes, which is a billionaires’ magazine, most importantly, you need to be able to buy status.”

Yuck, you say?

“It sounds horrible, and it is horrible if you handle it badly,” Fehr acknowledged.

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Why not just write compelling stories with relevant contexts. I won’t read a story just to get a ‘gimmick’. Show me a catchy headline with a good lead in first paragraph and I’m in. Otherwise, I’ll press ‘next’ faster than the speed of light. Also, get rid of all those annoying ‘pop ups’ that rudely interrupt and/or break concentration in the middle of a read. Seriously, the word ‘annoying’ can’t even begin to describe my sentiment for those ads. Get rid of them or tuck them in a corner. I’ll be happy to look at them after reading the article. Otherwise, the very act of interrupting a reader with pop ups defeats the entire purpose of trying to garner incremental readership. My two cents worth, and you didn’t even have to pay me for it.

The author suggests that every article come with a quiz. Okay, I’ll get us started:

1) What’s the ROI of your wife? 2) Forbes is a “billionaire’s magazine”. True or false? 3) Which company is responsible for the destruction of modern advertising? 4) One of out 10 people would not accept free content. Are you this person? 5) Fehr dispenses advice described as “soul-killing” and “brutal”. If he won the Nobel, would you invite him to dinner?